Ataxia Fitness Center is considering an investment in some additional weight tra

Question

Ataxia Fitness Center is considering an investment in some additional weight training equipment. The equipment has an estimated useful life of 5 years with no salvage value at the end of the 5 years. Ataxia's internal rate of return on this equipment is 6%. Ataxia's discount rate is also 6%. The payback period on this equipment is closest to (Ignore income taxes.): Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice 5 vears 4.21 years 2.50 years 5.31 years

Explanation / Answer

Payback period = Investment required / Annual net cash inflow

Note also that Factor of the internal rate of return = Investment required / Annual net cash inflow

Consequently, the payback period equals the factor of the internal rate of return. The factor for an annuity at 6% over 5 years is 4.212.Therefore the payback period is 4.21 years.

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